The euro area's common default risk: Evidence on the Commission's impact on European fiscal affairs

Roman Goldbach () and Christian H. Fahrholz
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Roman Goldbach: University of Göttingen, Germany

European Union Politics, 2011, vol. 12, issue 4, pages 507-528

Abstract: Sovereign creditworthiness within the euro area hinges upon the credibility of the Stability and Growth Pact (SGP). We analyse whether political events that worsen the SGP's credibility result in a shared default risk premium for all euro members, therefore leading to a joint deterioration of creditworthiness. We especially examine the decisions and statements of the Commission and the Council of Economic and Finance Ministers. Analysing daily data through the 1999-2005 period with an ARMA-GARCH model, we find the Commission plays a decisive role in affecting investor evaluations, where its credibility-strengthening decisions decrease volatility and statements signalling a weakening of fiscal credibility spark uncertainty on financial markets. Our results stress the importance of creating credible fiscal institutions that preserve sovereign creditworthiness within the euro area.

Keywords: EU Commission; euro area; fiscal policy; sovereign default risk; Stability and Growth Pact; volatility (search for similar items in EconPapers)
Date: 2011
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Persistent link: http://EconPapers.repec.org/RePEc:sae:eeupol:v:12:y:2011:i:4:p:507-528

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